Investing in and Repurposing Large Industrial Facilities after Plant Closures

Joe Muratore, CCIM

Being based in the Central Valley and East Bay Area of California (specifically Stockton and Modesto), we have seen our fair share of large industrial plant closures and movements. In the last few months, I have worked on several plant projects in some capacity and the purpose of this blog is to share what I have learned in the process.

In all cases, a large employer has decided for a variety of reasons to shut down and sell their plant. Several competing forces come into play when this happens: corporate Bureaucracy, economic distress, property neglect, community concern, and swarming service providers (brokers, equipment companies, former vendors, etc.). To be successful in this field you have to be prepared to go the distance as this is usually a multi-year process. Having done this a few times now, below are my thoughts on how to approach this type of investment.

Verify that there is an opportunity:

Generally, these facilities are large single purpose properties. They have towers and fuel tanks and equipment. They made milk or cereal or canned goods or grenades. The former owner of the plant was a large company or governmental agency and saw the value of the plant through the profitability of what it produced. They looked at it as producers rather than landlords. They generally were focused on their company’s mission and had little thought about how the property would be leased out, split up or otherwise repurposed once they were no longer producing there. This generally means they spent $10,000,000 to $100,000,000 on a building complex that now may be worth $2,000,000 to $40,000,000. If the Seller can find a user of the plant that will produce a similar product then they will pay way more than a group buying it in distress and repurposing it. The first pass is for the Seller to exhaust all efforts to find a buyer that will use the plant similarly to how it was previously used.

Survey the pieces of value:

These plants are often complex and confusing. They often have huge amounts of power water and sewer capacity. They have boilers and locker rooms. It is important that you break the complexity into understandable parts so you know what you can bid and mitigate against loss. Often these properties will go in and out of escrow more than once as sellers and buyers negotiate and mutually come to a realization of the actual market value of the property. Some questions to ask are: How many dock doors are there? How many roll up doors? Is there valuable equipment that can be sold or scrapped? Can that equipment be profitably removed from the facility? Are there truck scales? Is there more than one lot? Can lot line adjustments be done to create multiple parcels? Is there excess land that could be sold off or developed separately? Where are the bathrooms and office space? Can large spaces be broken into smaller spaces with separate entrances?

Survey the Pieces of Risk:

Frequently, old plants have environmental issues and underground tanks. Get the Phase I and plan on potentially doing a Phase II. Environmental damage is not the end of the world as sometimes you can use it to your advantage in the purchase negotiation. Just make sure you know exactly what you are working with and what your worst-case scenarios are. Map your utilities if possible, where do the lines run underground. If you are going to do a parcel split or two, how are you going to get utilities to each part. This can be very expensive.

Be Realistic and Conservative.

Be conservative as you value the real estate. There will be pressure to pay a high price, given how much the previous owner put into the property. You cannot pay what the plant was worth when it was formerly producing something else. You have to pay based on the future value of the plant, which may be much less than it once was. Because you are repurposing a property there is a lot that can go wrong, and often does, the electrical and plumbing will not be split as you would like it, roll up doors and fire sprinkler and alarm systems will need to be replaced and tenants will want office space and bathrooms where there are none.

Be Clear on Your Strategy in Advance

Sometimes a property is a long term hold but, in many cases, your strategy will be to repackage the property for another buyer. You will not be able to make a good enough return as a multi-tenant landlord and the upside will come from cleaning out the equipment, solving building problems, carving off extra land, and otherwise repackaging the property for another buyer that does not have the vision, knowledge or risk tolerance to take on the project from the start themselves. With this strategy, it is important that you understand your holding costs and have contingency and reserves built in. Often entitlements and permits and repairs take longer than expected.

All Real Estate is local

This point is a little self-serving but totally true. There are so many details in repurposing a plant that it is very difficult to do remotely. The conversion process takes nearly daily attention to detail. From working with utilities, to designing the new layout to finding tenants and potential buyers, having part of your team on or near the site is very helpful.

Build a Coalition

For large projects that impact whole communities, it is very important that you engage local elected officials and economic development groups early. It is important that you understand the objectives of the community and the decision makers. You must partner with them to create jobs, build attractive projects and increase the tax base. These groups can help clear out governmental hurdles and probably have ideas on tenants and buyers.

There are a lot of great reasons to repurpose large plants. It is a very creative process and the outcome can be a win both as an investment and for the local community.